Microsoft Word Audit Quality-Framework Final vs 20140214

31 common. In many smaller entities there is little distinction between management and those charged with governance; an owner-manager will fulfill both roles.
105. Users’ perception of the quality of an entity’s financial reporting is likely to be increased if they believe that the audit committee is made up of members that are independent from management and have an appropriate degree of financial literacy. Confidence is also likely to be increased if users are made aware, perhaps in the form of an annual report, of the activities that the audit committee has undertaken, the main issues that they have addressed, and the reasons for their conclusions.
106. As part of their governance and internal control structures, many larger entities establish an internal audit function. While the objectives and scope of an internal audit function vary widely, they typically include assurance and consulting activities designed to evaluate and improve the effectiveness of the entity’s governance processes, risk management and internal control. Those charged with governance may have oversight of the internal audit function and are likely to be interested in establishing that there is appropriate interaction between the work of the external auditor and the internal audit function.
107. In relation to the external audit, the attitude of the leaders of an entity, typically the directors of a company, is of fundamental importance. Some may consider the external audit as only a regulatory necessity, the cost of which needs to be minimized. Others may value the audit as a rigorous process that gives them confidence that published financial information is reliable as well as an opportunity to obtain insightful comments from a knowledgeable independent observer in relation to risks the entity faces, its control environment, and its financial reporting process. Those charged with governance of an entity can provide a positive influence on the quality of an audit by demonstrating an active interest in the auditor’s work, and taking action when they do not consider that the appropriate quality has been provided.
108. In larger entities, especially listed companies, audit committees often exist to oversee the relationship between the entity and the auditor. This can include the appointment of the auditor, the assessment of the independence of the auditor (including the provision of non-audit services), and the approval of audit fees. As long as they are motivated to maximize the quality of an audit rather than minimize cost, audit committees provide a way of helping to ensure that sufficient, appropriate resources are allocated to the audit.
109. Some audit committees also have a responsibility to consider audit quality directly and do this as part of the process for the reappointment of auditors or when considering audit fees. This can be assisted if the audit committee has a formal process and criteria for describing the attributes of audit quality. Audit committee consideration of audit quality will be influenced by the interactions with the auditor (see paragraphs 53 to 56) and in particular by an assessment of the professional skepticism applied.
110. There is usually a relationship between the quality of an audit and the quality and quantity of the resources used in its performance; this will usually be reflected in the audit fee. However, a low audit fee can never be a justification for failure to adequately resource an audit and obtain sufficient appropriate audit evidence. It is important that audit committees consider whether sufficient audit time is planned. This is especially important when audit fees are negotiated directly with

32 management. Management is often highly influential in determining audit fees, and may have a different perspective on audit quality from that of the audit committee.
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